Old income tax regime or new? Work out the math before you make your choice

Compute your income-tax liability twice, under the old system and the new. Factor in likely events like job loss of pay cuts

The Income Tax department issued a clarification earlier this month that should help you decide if you want to move to the new tax regime or stick to the old one. The circular clarified that employers can start deducting taxes at source on salaries from the beginning of a financial year, based on the employee's choice of regime. The employee has to state his choice in a declaration, which your company's Human Resource department would, in all probability, have already asked you to furnish. But if you haven't heard from them yet, don't fret, you will soon. You could also get in touch with your HR and tell them your choice.

Clarifications: Apart from the one on TDS, there is another that calls upon an employee opting for the concessional income tax regime (the new one) to notify his employer in each subsequent financial year as well. The good part is that this will make things easiwer for your company's accounts department. Suresh Surana, founder, RSM India says, "Such intimation is made only to enable the employer to compute and deduct TDS. This is a necessary step, especially for those organisations that have to maintain and compute the data for a large number of employees." Remember, that while this is an intimation to your employer, you do have the option of switching to the other regime at any point later in the year, till the last date of filing of return. Many believe, however, believe that this may end up hurting employees who don't get their math right. 

Naveen Wadhwa, DGM, Taxmann says, "The circular brings clarity, and also helps the employer to avoid disputes that may arise due to deficiency in the deduction of tax. However, it may hurt the employees as they have an option to choose between the old and new tax regime till the last date of filing of return. Employees filing a declaration to opt for new tax regime may find it challenging to claim certain exemptions if, at the time of filing return, they continue with the old regime.

Further, any deficiency will invite a levy of interest. What if a particular concession is not available and the employee wrongly opts it, due to which lower TDS is deducted? Kapil Rana, Chairman and Founder, HostBooks Limited says, "In such cases the employee will end up with a huge tax liability at the time of filing the return. Hence, in my opinion, there should be room to modify the option of exercising concession at-least once in the previous year."  

If you fail to give the intimation, the employer shall calculate TDS without considering the provision of section 115BAC of the Act, which offers the concession on the new tax regime. The CBDT has said the employee can change the option of tax structure at the time of filing income tax return and the amount of TDS payment will get adjusted accordingly. Wadhwa says, "It must be noted that once the option is exercised, it will apply to forthcoming years as well if the assessee is earning business or income from profession. If the taxpayer does not have any business income, the assessee will have a choice to decide every year if he wants the concessional tax regime."

New or old? 

Ashok Shah, Senior Partner, NA Shah and Associates says, "As per the new tax regime, the taxpayer has to forego certain exemptions/deductions provided under the Act. Choosing between the two tax regimes would also depend on various other factors such as income level, sources of income, investment appetite, saving habits etc. The individuals will have to work out their tax liability under the old and new tax regime before deciding which one is more beneficial. Broadly, the concessional tax rate can be said to have limited applications and will benefit those in the lower income brackets, who do not have much deduction /exemption." So while making this decision, you must analyse the pros and cons of both the regimes in order to make a well-thought-out and wise decision. For instance, the old regime has benefits like inculcating the habit of investing and saving, which can help in meeting any future eventuality.

Similarly, the new regime has its own benefits like reduced tax rates, reduced compliances, increased disposable income, etc. Shah says, "It is important to keep in mind that a person having business income needs to take decision wisely, since once new tax regime is opted for, he will have limited options to change in subsequent years." The hassle of maintaining documentation and proof of investment is not required in the new concessional tax regime under section 115BAC as against the old tax regime.

In case of job loss: Coronavirus continues to create havoc globally. The worst part is that no one knows how long the pandemic would last. Shah says, "If it continues for some more time, pay cuts and job layoffs may not be a surprise for employees." In case you risk losing your job or have already lost it, your financial situation will change drastically, and your choice of regime will change too. Surana says, "Employees who already fear a job loss should definitely opt for the the concessional tax regime until and unless they have alternative opportunities to make good the income loss." 

Pay cut: What about employees who are facing liquidity issues due to a salary cut? This situation will have an immediate impact on your cash flows, and you may need to consider the fact that most of the eligible investments could even be made on or before March 2021 and as such they have sufficient time in hand. Experts say that if you may be able to make investments in eligible instruments till such time, they may opt for the old regime or otherwise the new system.